Pork 101: The economics of hogs

Economics teachers who search for new or unusual classroom examples
of real-life economic phenomena would do well to consider the current
debate about changes in the hog industry, where articles in daily
newspapers illustrate many concepts included in a college microeconomics
course.

For example, the question of whether large hog operations have
lower production costs involves the shape of the long-run average
cost curve for the industry. This curve shows the minimum costs,
or production, for the whole possible range of facility sizes. In
the range where average costs drop with larger facilities, economies
of scale exist. And if there is some range where average costs
increase with larger facilities, diseconomies of scale are present.

The fact that demand for U.S. corn exports is affected by rising
consumption of eggs, poultry and pork in Asia is an example of derived
demand, the idea that demand for raw materials or intermediate
goods depends on the demand for final goods.

If producing hogs does harm the environment or people who live
near hog facilities, externalities are present. The external
costs of hog production are the amount by which the social cost
of hog raising is greater than the costs borne by the economic
agent (facility owner) who makes the decisions.

When farmers in one state call for easier regulation in their
state because they cannot compete with farmers in other states with
fewer rules, they make the implicit argument that states are caught
in a Prisoners' Dilemma, a situation in game theory
which was first laid out by von Neuman and Morgenstern. In such
a dilemma, society as a whole ends up in a sub-optimal situation
because of mutual fears of what the other party will do. The same
situation is argued to exist in state and local subsidies of new
industries or professional sports teams.

Traditional economists in the early years of this century were
fond of saying "It's all in Marshall," referring to the long-standing
economics text penned in the 1880s by the British economist, Alfred
Marshall. But contemporary economists need not go that far back,
it's all in the National Hog Farmer.